What will higher interest rates mean for the NZ sharemarket? Photo / File
What will the Reserve Bank’s 75-basis-point rate hike mean for a sharemarket that has already suffered at the hands of higher interest rates?
High-yielding stocks and high-growth stocks have already taken a pounding this year as bank deposits started to become a viable alternative for investors.
Looking ahead, fund managers said that that emphasis was set to shift to the likely impact that high rates will have on the economy and on corporate earnings.
“I think the impact for equities is going to be indirect in that people will look at the implications of a slower economy on earnings going into next year - that’s going to be the key transmission mechanism for stocks,” Salt Funds managing director Matt Goodson said.
“Clearly, a 75-basis-point rate hike will slow the economy down - that’s the whole idea.
“A lot of people still have mortgages taken out at older, lower rates, that are still to roll over into higher rates.
“So the economy is going to have a pretty tough election year I think, and earnings certainly will be the key in distinguishing between companies,” Goodson said.
Higher interest rates have had an impact on stocks - that’s now priced in to a reasonable degree, he says.
Twelve to 18 months ago, investors sought the TINA (there is no alternative) stocks - the yield and growth at-any-price stocks - because deposit rates were not far off zero at the time.
Those yield and growth stocks have been hit hard this year as interest rate rises have kicked in.
“Looking at the year ahead, it’s going to be those stocks with earnings sensitivity and that’s where the 75-basis-point rate hike will hit.
“The great worry is that, will the economic slowdown be enough to get on top of inflation, given that some of the inflation drivers are supply-side driven, which we see everywhere with shortages of virtually everything,” Goodson said.
“Our concern is that while inflation may have peaked, it could still take quite some time - multiple years - to get back to the Reserve Bank’s 1 to 3 per cent target range.”
Harbour Asset Management portfolio manager Shane Solly said the spotlight was shifting from the rate of return that investors require, to corporate earnings prospects.
“Again, the companies in our market are relatively defensive.
“The generator-retailers are probably going to do okay, but some of the more cyclical parts of the economy will be exposed if we see a significant slowdown,” Solly said.
“It will be stock-by-stock, so that’s what the market is grappling with right now.”
Jarden investment strategist and economist John Carran thinks the Reserve Bank may have gone too far.
The messages in the bank’s policy Statement were “unambiguously” hawkish, Carran said in a commentary.
Carran said the Reserve Bank’s deliberations appear to be more focused on recent inflation and labour market outcomes than they have been in the past, rather than possible future outcomes.
“This is no doubt due to the substantial extended miss on the RBNZ’s 1-3 per cent inflation target and recent upside surprises on CPI inflation outcomes.
“The RBNZ is seeking to prevent further erosion of its inflation-fighting credibility by taking assertive action to quell inflation, even if this causes an economic recession and significantly higher unemployment.
“However, monetary policy changes impact the economy with a considerable lag. Recent rapid OCR increases, which have led to sharp rises in retail borrowing costs, have yet to have their full effect.”
The central bank appeared to be giving low weight to clear signs global inflation pressures are easing, with sustained falls in commodity prices and shipping costs.
“In addition, the chances of global economic recession have materially increased, which could put further downward pressure on commodity prices and reduce demand for New Zealand’s exports,” Carran said.
He noted that the economy of New Zealand’s largest trading partner, China, was struggling.
“Because of these influences, there is a significant risk the RBNZ over-tightens monetary policy causing more economic pain than is necessary to sufficiently control inflation over the medium-term.”
My Food Bag directors Jonathan Macdonald and Mark Powell, and newly appointed CEO Mark Winter, have been buying shares in the company, which have fallen further since the release of last week’s first half result.
Disclosures to the NZX showed that Macdonald lifted his holding to 120,000 shares from 100,000, paying $9,800 for the additional 20,000 shares.
Powell spent $51,565 on buying 105,000 shares.
Macdonald’s and Powell’s purchases were at around 49c a share.
Winter, spent $7,483, or 47c a share, on raising stake by 15,853 to 276,293.
Shares in My Food Bag came under pressure after the company last Friday reported a fall first half net profit to $5.9m in the six months to September 30, from $9.4m in the previous corresponding period. Post result, the stock dropped by 10c to 49c.
Powell, who served as The Warehouse’s chief executive for five years, was appointed to the board as an independent non-executive director of My Food Bag on November 1.
Macdonald has been on the board since January, 2021.
The company appointed Winter as chief executive early this month, replacing Kevin Bowler who resigned in September.
Winter had been in the role as interim CEO.
My Food Bag shares have been a disappointment since investors bought into the IPO in March 2021 at $1.85, allowing existing shareholders to sell down their holdings.
Since listing, the shares have failed to surpass their issue price and have been on a slide ever since.
Eastland Network will join the Firstgas Group of companies following its acquisition by international infrastructure investor, Igneo, for $260m.
Igneo is the owner of Firstgas Group companies and following a competitive process, was selected by Eastland Network’s parent company Eastland Group, and their shareholder Trust Tairāwhiti, to acquire the lines business.
Igneo’s purchase is subject to approval by the Overseas Investment Office, which is expected in the early part of 2023.
Taranaki-based Firstgas Group provides the infrastructure to deliver natural gas, and supplies LPG to more than 430,000 Kiwi homes.
Firstgas Group manages both regulated and unregulated businesses with a total regulated asset base of nearly $1.1 billion and in the 12 months to September 2022, commissioned $80m of regulated assets.
Igneo has been an active investor in New Zealand in recent years.
It created First Gas after buying Vector’s gas unit for about $1 billion in 2016.
In April, Igneo paid $1.9 billion for Waste Management.
Igneo is an “autonomous investment team” in the First Sentier Investors Group, investing in high-quality, mature, mid-market infrastructure companies in the utilities and transport sectors in the UK, Europe, North America, Australia and New Zealand.
The New Zealand sharemarket has fallen 5% in the first half, while others have gained.